Expansion of Business Activity and Impact on Share price

Expansion of Business Activity and Impact on Share price

• Sales and profit are the main drivers of Shareholders wealth creation in the long-run. Expansion of business activity is very essential for survival and growth of business as well as shareholders wealth

• Expansion of business may be undertaken either by mode of merger/acquisition with another corporate entity or by making an addition to existing fixed assets of the company

• Expansion of business activity normally results in increased share prices due to higher sales and higher profits. Companies can carry out expansion either by : 

1. Internal accruals of existing business
2. Borrowed fund
3. Equity dilution
4. A mix of all these options

• Companies which carry out expansion from internal accruals of existing business are the best ones to invest in. Expansion carried out solely by equity dilution results in lower per-share profit to existing shareholders. Expansion carried out solely by borrowed fund might result in lower profits due to interest expense and cash flow is also impacted due to repayment of borrowed fund via periodical installments. Mix of all these options might be suitable considering capital structure and other factors specific to the company

• Companies which are functioning at maximum capacity utilization and do not carry out expansion have less scope of superior shareholder wealth creation

• Gestation period is the time taken for fixed asset to be put to use in case of expansion. In certain industries which are complex by nature the actual time taken for completion of expansion activity from it's inception is substantial and can be anywhere from 2 to 5 years. In such cases the impact of expansion on sales and profits can take time to appear on financial statements and share price might not provide sufficient appreciation during gestation period

• It is normally advisable to invest in a company 6-12 months period prior to expected completion of expansion. So that investor is able to enjoy the benefit of share price appreciation in just the time when it is about to happen rather than waiting for long years.

• Sometimes expansion fails and there is decline in share price. Historically it is visible that expansion carried out by a large proportion of borrowed funds in regulated sector like Infrastructure have failed. Also expansion carried out in sectors where major technological disruptions are visible in near future have high failure rate. Sectors which are nearing end of life cycle and are slowing down also can have high failure. These type of sectors and companies should be avoided by investors at all cost.

• Factors like tax considerations, market size, consumer demand, government policies for the sector, market sentiment, technicals on chart of stock etc. shall be given due consideration before arriving at decision of investment in the stock

Price Earnings Ratio (P/E Ratio) : What is it and how to use it ?

Price Earnings Ratio (P/E Ratio) : What is it and how to use it?


Introduction 

Price Earnings Ratio is a relative measure used to value a stock. Relative measure makes it comparable to stocks of other companies. Out of many modes of valuation, it is one of the ways for assessing investment viability in stocks. Price Earnings Ratio is relationship between a company's stock price and earnings per share (EPS). Lower the P/E ratio the better deal normally for an investor.

P/E Ratio can be calculated using any of below-stated formulas : 

P/E Ratio = Stock price per share/ Earnings per share

                                    

                                     OR

P/E Ratio = Market Capitalisation/ Total Earnings

Basically, there are two types of P/E Ratio. Trailing and Forward. Trailing is based on previous periods earnings whereas Forward is based on future earnings estimate.

Use of P/E Ratio : 

Looking at the P/E ratio of stock tells you very little about it, if it’s not compared to the company’s historical P/E or the competitor’s P/E from the same industry. It’s not easy to conclude whether a stock with a P/E of 10 times is a bargain, or a P/E of 50 times is expensive without performing any comparisons.The beauty of the P/E ratio is that it standardizes stocks of different prices and earnings levels. In general, a high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. 

Companies with a high P/E Ratio are often considered to be growth stocks. Investors have higher expectations for future earnings growth and are willing to pay more for growth stocks. The downside to this is that if the stock is not able to deliver higher growth in future then decline in share price is substantial. For this reason, investing in growth stocks is more likely to be seen as risky investment. Stocks with high P/E ratios are also considered overvalued normally.

Companies with a low P/E Ratio are often considered to be value stocks. It means they are undervalued because their stock price trade lower relative to its fundamentals. This mispricing will be a great bargain and will prompt investors to buy the stock before the market corrects it. Examples of low P/E stocks can normally be found in mature industries. A low P/E can indicate either that a company may currently be undervalued or that the company is doing exceptionally well relative to its past trends or future expected rate of growth is low.

Normally it is advisable to invest in stocks which have P/E ratio below 20.

P/E ratio can be considered as an important parameter and starting point in stock selection process. However, P/E ratio is not the sole factor to be considered for identifying stock for investment. An investor must dig deeper in the company’s financials and use other valuation and financial analysis methods to get a better picture. 

One can filter for stocks with less than or more than a certain P/E ratio on www.screener.in (The website is free and useful resource for investors.)

Associated Alcohol & Breweries Ltd : A stock with Huge Potential

                    Associated Alcohol & Breweries Ltd : A stock with Huge Potential

CMP : 265-270

BSE CODE : 507526

Market Cap : 485 Crore

LISTED ON : BSE

TARGET : 600/800 

TIME-FRAME : 12-18 Months

History of the Company :

Associated Alcohol and Breweries Ltd was incorporated in the year 1989 and have been leading supplier of IMIL to Government of Madhya Pradesh. In 2017-18 company was present in Delhi and Madhya Pradesh. In 2018-19 company plans to enter 5 more states namely Kerala, Maharashtra, Goa , Pondicherry and Chhattisgarh.

As a leading player in alcohol industry in India, company has presence in every aspect of value chain. Company holds portfolio for manufacturing international brands like Bagpiper Whisky, MC Dowell No.1 Celebration Rum, White Mischief Vodka,Blue Riband Gin, Director Special Black.

Extra Neutral Alcohol (ENA) is a vital ingredient in the making of an alcoholic beverage. Associated alcohol and Breweries Ltd supplies this vital ingredient to many leading manufacturers under a special agreement. In the IMFL segment, the company has an understanding with reputed companies like Diageo (owner of brands like Smirnoff vodka and johnnie Walker Scotch Whisky), Mason & Summers and Diageo-Radico. These companies buy a total 50-50% of the total IMFL produced by company. The balance production is used for direct supplies to the branded suppliers across the country, apart from manufacturing it has it's own branded products.

In-house brand names of the company include jamaican magic rum, titanium tripple distilled vodka, central province whiskey etc. Franchise brand include black dog, smirnoff, captain morgan etc.

In 2016-17, 20% of revenues came from IMFL and 3% of it was from premium offerings. Moving forward, by 2020, company expects to increase the IMFL revenues to 50%, and 50% of IMFL revenues will be from premium varities.

In the beginning, 100% of power was sourced from the grid. In 2016-17 Company derived 60% of electricity needs through a high-pressure turbine. The rest was acquired from solar energy and the grid. Company intends to be more than self-sufficient for it's electricity needs.

Main Business Activities : 

• Potable Alcohol

Financials of the Company : 

• Profit After Tax (PAT) for the year ended on 31st March,2018 has been reported  at Rs 25 Crore and turnover at Rs 324 Crore.
• As per the numbers as on 31st March,2018 the company has generated Return on Equity of approx. 24% , Return on Capital Employed of 32% and Return on Assets of 19%
• The company is a regular dividend paying company and has paid dividend for past 5 consecutive years.
• Debt to Equity ratio is below 1 and is reasonable in nature
• The company has carried out and completed a major expansion in 2018 which has resulted in 50% capacity expansion. It has gone live from August 2018 and it will yield in higher top and bottom line from Q3. Entire Capex was self-funded.
• Company plans to further carry out another 100% capacity expansion from current levels to be completed by 2021

Investment Rationale : Why to Invest in this Stock ??

• Shareholding of the promoters in the company is 59% as on 30th September,2018 which strongly indicates interest of promoters in growth of the company.
• Market Cap to Sales Ratio : 1.38  is attractive for an Alcohol/brewery company
• Technically on chart the stock appears to have completed bottom formation which was going on since past 2-3 months and is ready for surge soon.
• At current price of 265 Rs per share and EPS of 17 Rs on trailing basis , the stock is presently trading at an attractive P/E ratio of 15
• At a forward reasonable P/E of 25 and EPS of 25.00, we expect the stock price to soar higher atleast to 625 and higher levels in coming time.

Disclaimer Note: The above is not a research report but information as available on public domain and it should not be treated as a research report. Registration status with SEBI: I am not registered with SEBI under the (Research Analyst) regulations 2014 and as per clarifications provided by SEBI: “Any person who makes recommendation or offers an opinion concerning securities or public offers only through public media is not required to obtain registration as research analyst under RA Regulations.

Disclosure: It is safe to assume that I might have Associated Alcohol and Breweries Ltd  in my portfolio and hence my point of view can be biased. Readers should perform own due diligence before investing. We do not assume any responsibility or liability resulting from the use of information , judgments and opinions for Trading or Investment purposes on the Blog.